Crypto-regulation: Why ICOs need more regulation

Investing in a new business is always a leap of faith. There are no certainties when putting your money into an investment and this is the same for cryptocurrencies.

In the UK, investments are covered by regulations from the FCA (Financial Conduct Authority). They are responsible for licensing and regulating financial firms, assessing new financial instruments and new investment propositions such as initial coin offerings (ICOs).

An ICO is a type of crowdfunding for business models based on cryptocurrencies. However, they run past the usual regulations for raising capital and, moreover, the concept actually ensures that investors lose their money over and over again.

In many ways ICOs are very similar to IPOs (initial public offerings) but instead of receiving company stock investors receive company tokens that can be traded at crypto exchanges. It has been five years since the first ICO went live and they have since raised over $6 billion. Cryptocurrencies are increasing in size and importance in the market, so the calls for more regulation are becoming louder and louder, for good reason.

So, with that in mind, why do ICOs need more regulation and how can it be done?

Why do investors keep investing in ICOs?

As we have stated above, unlike most types of investment ICOs are not regulated by the FCA, or other financial governing bodies around the world. This may seem like a negative, but many small businesses and startups find it difficult to raise capital through more traditional regulated routes of investment. If your reasons for needing investment seem like a too big a risk it is easy to be turned away.

ICOs can offer quick investment from investors willing to make a smaller investment, even if it means a bigger risk of losing their money. Many startups have big ideas but little investment. Turning to other avenues of investment can ensure a big investment in a short period of time without the charges, and other difficulties, that regulated investment can bring.

Why do ICOs need more regulation?

At the moment if you invest money in ICOs, and the business plan associated with it, the business has no legal obligation to deliver on the plan. This makes investing in an ICO extremely risky for the investor. The business plan could look an incredible proposition and well worth investing, but turn out to be a scam.

Due to the decentralised nature of cryptocurrencies, scams and fraud can be easy to pull off. Without regulation there is no way to hold scammers responsible. With crypto regulation, fraud and scams should be much easier to spot. If you do fall for a scam you can report it to the FCA to move through a dispute process and potentially get your investment back.

If you get hacked when investing in an IPO you are able to claim some of the money back. If ICOs are regulated a similar system can be put in place.

Assurances over some of the issues that ICOs currently face could increase the investment potential of new ICOs, raising funds quicker, easier and receiving larger investments.

The biggest obstacle to ICOs becoming a stable investment to rival more traditional currency trades is the risk involved in investment. The aforementioned fraud and scam risks destabalise the market to the extent that the value of Bitcoin has been as high as $20,000, in mid December 2018 its value was as low as $3,200. Regulation should stabalise digital currencies and create a more attractive market for investors.

There is still little doubt about the potential that cryptocurrencies could have as means of payment – Bitcoin and other cryptocurrencies are in fact already widely used in such a way. Investment business is a rather different story, as they lead quite often to massive depreciations.

In regards to investing in ICOs the FCA offers some advice:

“Fully research the specific project if you are thinking about buying digital tokens. You should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself (e.g. business plan, technology, people involved) and prepared to lose your entire stake.“

Suggesting that you should be ‘prepared to lose your entire stake‘ gives a grim outlook on any investment you make on cryptocurrency. It could also suggest that the FCA is unwilling to move into the extremely complicated and treacherous road that is ICO investment.

ICOs certainly need more regulation. The risk of investment and high possibility of fraud can lead to severe losses. Regulatory bodies need to explore enforcing new regulations on ICOs as they appear to be here to stay.